Monday, July 25, 2022

SEC enforcement director’s House testimony sheds light on agency’s priorities

By Suzanne Cosgrove

Appearing before the House Subcommittee on Investor Protection, Entrepreneurship and Capital Markets, SEC enforcement director Gurbir Grewal told legislators he aimed to restore the public’s trust in financial markets and “make clear that there is only one set of rules” while maintaining the SEC’s mission -- ensuring fair, orderly and efficient markets, and facilitating capital formation. The SEC has seen an increase in the number of cases that are litigating and going to trial. During fiscal year 2021, the Division had approximately 2,000 pending civil litigations and 1,200 pending administrative proceedings, Grewal said.

In addition, the SEC division is taking proactive steps to police new areas of importance for investors, as well as the “continually evolving risks” they face, he said, including in crypto assets and cybersecurity.

Speaking the day before a House vote on FY23 appropriations, Grewal stressed the need for the allocation of more than 100 new SEC positions, with 20 slated for the agency’s Crypto Assets and Cyber Unit, a request contained in the SEC’s fiscal year funding proposal. The added positions would still result in a total number of positions that would be smaller than the agency had in 2016, Grewal said.

As reported previously in Securities Regulation Daily, the House subsequently passed a bill that would provide FY23 funding for the SEC and the CFTC. The SEC would be funded at more than $2 billion if the House bill is enacted, but it still must go before the Senate.

Trust restoration. Circling back to the issues of trust, Grewal noted rapid increases in technology have created new avenues for misconduct. Public companies and other market participants need to think carefully about how their business models and products interact with both emerging risks and their obligations under the federal securities laws, he said.

“Robust compliance is a responsibility shared by all market participants,” he said. Companies “cannot rely on check-the-box compliance policies, but should consider, where appropriate, developing bespoke policies tailored to their businesses and the associated risks,” Grewal said. “Where they fall short, we have not hesitated in holding them accountable.”

Citing recent charges against Ernst & Young LLP in connection with cheating by audit professionals on exams required for Certified Public Accountant licenses, Grewal said when gatekeepers, such as accountants and attorneys, fail to live up to their obligations, investors and the integrity of markets suffer. Ernst & Young admitted the facts underlying the SEC’s charges and agreed to pay a $100 million penalty and undertake remedial action.

Contentious questioning. Following his prepared remarks, Grewal faced often sharp questions from House committee members, who focused mainly on the SEC’s involvement related to digital assets–and their recent meltdown--and ESG issues. Addressing the SEC’s complaints regarding ESG disclosure rules, for example, Rep. Ann Wagner (R.-Mo.) asked the director, “What statute allows the SEC to regulate climate change?”

“We can enforce when there are lies,” Grewal said. As an example, he noted the SEC’s charges against BNY Mellon Investment Adviser, Inc. for misstatements and omissions about ESG considerations in certain mutual funds it managed. To settle the charges, BNY Mellon later agreed to pay a $1.5 million penalty.